IT giant’s shares Infosys Limited, Responding to the company’s Q2FY23 earnings, the National Stock Exchange rose nearly 5% on Friday. There were some hits and some misses in the September quarter results. At the same time, the attitude of the management was largely cautious.
Constant currency revenue grew 4% sequentially in Q2, not exceeding the consensus estimate of 4.5%. Still, Infosys has outperformed its close rival Tata Consultancy Services Ltd on this parameter. However, the Ebit (earnings before interest and tax) margin was higher than expected at 21.5%. Margins were boosted by several tailwinds such as favorable currency movement and cost optimization.
Analysts at IDBI Capital Markets & Securities Ltd said, “We believe margins have narrowed in Q1 FY23. Hence, we expect easing of supply side challenges, due to sub-con costs. Margins will improve due to plateau and lower fresher cost.”
In addition, the total contract value of its big deal wins was strong at $2.7 billion, a gradual and annual improvement. Analysts say this was the highest in the last seven quarters. In a post-earnings call with analysts, the management said its pipeline remains strong.
But on the other hand, there is an increasing number of sectors where signs of weakness in technical spending should be noticed.
Management commentary suggested that hi-tech and telecom were the other two segments, followed by retail and mortgage, where caution is emerging on tech spending. Note that Infosys has raised its FY23 constant currency revenue growth guidance to 15-16% from the earlier 14-16%.
According to analysts at Kotak Institutional Equities, the guidance implies a compounded quarterly growth rate of 0-1% in revenue in the second half, indicating slowdown and caution and in line with their outlook. “We anticipate 8.3% c/c growth for FY2024E and a recovery of 12.5% in FY2025E,” the Kotak report said.
There has been some respite from earnings of Infosys in the backdrop of deteriorating global macro. The company’s shares have fallen nearly 22 per cent so far this calendar year, which is less than the 28 per cent fall of the sector index Nifty IT. Sector valuations have also declined. A meaningful turnaround in the stocks depends on the revenue visibility for FY24 in the coming quarters. Unfortunately, there is not much clarity on this yet.
Analysts at Nirmal Bang Institutional Equities said, “While the consensus expectations for FY23 will remain stable after several quarters of cuts due to disappointing margins, we believe there is a huge divergence of views on FY24. “
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